If you have an HSA, no matter if you are actively making contributions or deductions, you will need to get prepared for filing your tax return. Understanding the HSA tax details is the first step in this process. We will give you a quick review and help you get prepared for tax season.
The HSA is one of the most tax advantageous accounts on the market. In addition to being the only dedicated long-term health savings option, the HSA provides a clear path to 100% tax-free savings, investment, and spending. That is, as long as you know (and adhere to) the tax details.
Whether you are new to HSAs or have had a Health Savings Account for years, Lively is here to dissect the complexity of your HSA tax obligations. We will help showcase key requirements you need no matter if you this is your first year with an HSA, have multiple HSAs, or transferred your HSA to a new provider.
HSA tax benefits (and non-taxable items)
You may have heard that HSAs are "triple tax advantaged," which means:
- Tax-free savings for all HSA contributions (bonus FICA savings if they are made through payroll).
- Tax-free growth (interest and investment) for all HSA money creates a tax-free way to invest your HSA funds for years to come.
- Tax-free withdrawals for qualified out-of-pocket medical expenses enables you to save and use 100% tax-free dollars with your HSA, effectively saving you 25% off the retail cost (25% assumes combined state and federal income taxes of 25% or more).
Most states provide for these tax savings as well, but not all. Be sure to check with your tax professional to determine what your tax impact may be at the state level.
One of the greatest qualities of an HSA is that your funds and incurred medical expenses never expire. Recall qualified medical expenses may be withdrawn from an HSA at any point. Said differently, an expense you pay out of pocket is an indefinite “IOU” against HSA funds. You choose when you want to withdraw money, whether this is at point of sale, at the end of the year, or even decades later.
Another distinct bonus is that HSAs transfer tax-free to a spouse or estate asset for others. It can bring some comfort to know that all your saving and investing can benefit your heirs when you pass away. For your spouse, this means the HSA remains an HSA: tax-free withdrawals for qualified medical expenses. For all others this becomes an estate asset, transferring as other tax-preferred savings but losing its status as an HSA. Your tax advisor can describe the mechanism and what it could mean for your estate, as well as specifically advise you on the advantages an HSA can offer you for your specific tax case.
HSAs and medical expenses
HSA contributions and withdrawals are reported using IRS Forms 1099-SA and 5498-SA. However, taxpayers are responsible for maintaining “adequate documentation” on their medical expenses, such as receipts. On Lively's dashboard, you can easily upload receipts to ensure IRS compliance.
Should HSA withdrawals be used for purposes other than qualified medical expenses you’ll be subject to a 20% penalty from your IRS funds (based on the final purchase amount) plus taxes. Any taxes and potential penalties (<65 years of age) due are captured under the “other income” line on your Form 1040. If you are over 65, you can spend your HSA on anything you want, but non-medical expenses are subject to income tax.
HSA contribution refresher
As a quick review, each year the IRS sets inflation-adjusted annual contribution limits for HSAs, which are different for individuals and families. It's important to review your HSA contributions each year to ensure you have not over-contributed to your HSA. If you are 55 years of age or older, you can make an extra $1,000/year "catch up contribution", so keep that in mind.
You also have until the tax deadline each year to maximize your previous year's HSA contribtions, known as a "prior year contribution," which can help you save on your taxes.
HSA Tax Scenarios
I opened my first HSA.
Welcome, you now join over 34 million HSA account holders. You will need a few forms to prepare for your taxes, but unless you over-contributed, or use your HSA for non-qualified expenses, it should be straightforward. You can refer to our HSA tax form checklist and tax guide for an overview of what you need to know.
I have multiple HSAs
You will be required to obtain multiple forms (one per HSA). On top of that, HSA contributions are regulated by eligible individuals, so if you or a family member are contributing to multiple HSAs, you need to ensure you are below the yearly eligible contribution limit for your HSA.
I transferred my HSA to a new provider (and closed my previous HSA)
There are a few nuances to an HSA transfer from the type of transfer normal rollover, trustee-to-trustee, IRA to HSA rollover and the annual or lifetime limits imposed for each. You will need to show your HSA transfer/rollover (which will be reported as an HSA distribution) into your new HSA account (which will be reported as a transfer) so that these two events can be offset for tax purposes. Beware, without tax forms from both providers, you could be on the hook for an early HSA distribution penalty.
During tax season the paperwork can be frustrating. We hope this overview has eliminated a need to search for any unnecessary forms that further waste your time. Be vigilant about all of the tax requirements that are part of your HSA account to ensure you are tax compliant.
Get started with Lively
If you are looking to open an HSA to enjoy a triple-tax advantage, Lively offers an easy-to-use platform and unparalled customer service.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.